Andy Constan: The Bond Market Will Take The Stock Market Down With It

Episode Summary

Executive Summary: Andy Constan argues the market is in his “Act 3”: rising long yields from Treasury supply and term-premium expansion are weighing on equities even as the economy slows only modestly. He is bearish stocks and long bonds, but prefers 2-year notes over 10-year bonds, thinks recession odds are underpriced, and sees QT/QRA/Treasury issuance as the key macro driver.

Main Topics: Constan’s five-act market script and current phase (Priority: 5/5): He maps markets through a sequence from higher-for-longer rates to rising yields, equity weakness, earnings contraction, and eventual recession. He says the market is now in Act 3, where equities are catching down to falling bond prices. Treasury supply, QRA, and term premium as the main bond driver (Priority: 5/5): Constan emphasizes that Treasury issuance choices, especially coupons versus bills, are pushing long yields higher through term-premium expansion. He views this as a slow-moving but persistent headwind for bond prices. Positioning: bearish stocks and long bonds, bullish 2-year notes (Priority: 4/5): He is currently bearish on equities and long-duration bonds, while favoring 2-year Treasuries as a relative-value expression of the market overpricing near-term Fed cuts. Fed policy, cuts, and the limited odds of hikes (Priority: 4/5): Constan thinks the Fed’s next move is more likely no move or cuts rather than hikes, but notes the market has priced down cut expectations sharply. He argues short rates matter less than long rates for the economy. Gold, FX, and global real-rate dynamics (Priority: 3/5): He links gold strength to lower real rates in Japan and China, reserve diversification, and central-bank behavior, while noting he is tactically short gold from elevated levels. China, Japan, and global spillovers (Priority: 3/5): He says U.S. fiscal and monetary actions are driving global rate pressure, while Japan and China are managing currency and inflation dynamics in ways that affect gold and global assets. Research products and trading framework (Priority: 2/5): Constan explains how Dam Spring and Two Great Beards differ: one targets institutions with macro research, the other retail investors needing concise weekly guidance. He also outlines his multi-factor macro process and risk management.

Key Arguments: The market is in Act 3 because higher long-term yields are finally pressuring equities after the Treasury and Fed shifted policy expectations. Treasury issuance matters more than many investors think; coupon supply and QT create a slow drip of duration that keeps bond prices under pressure. He has left “higher for longer Island” because front-end pricing has become too crowded and now implies far fewer cuts than before. He is not forecasting an immediate recession, but thinks recession odds are underpriced relative to market pricing. 2-year notes are attractive because they embed only a limited amount of Fed easing and are a cleaner way to express a future policy shift. Stocks and bonds are both vulnerable when term premium expands and growth slows; in that regime, rising yields can compress equity multiples. Gold’s move reflects global real-rate dynamics and diversification flows more than just U.S. inflation expectations. The Fed should have used stronger QT and direct bond sales earlier; long rates, not short rates, are the more important macro lever. The Fed’s latest QT taper changes the pace, not the destination, but it may signal a lower eventual reserve target could be less certain. Macro investing requires building portfolios around multiple drivers, because correlations can change and no single variable controls asset prices.

Data Points: Act number: Act 3 - Constan says the market is currently in the phase where equities catch down to falling bond prices. Expected Fed cuts by end-2027: 125 bps - He notes the market now prices only 125 basis points of cuts through December 2027. Fed cuts priced four months earlier: 175 bps in 2024 alone - He contrasts current pricing with much more aggressive cut expectations earlier in the year. Worst drawdown in Q1: -7% - Constan says Dam Spring was down 7% at its worst drawdown in the first quarter. Treasury gross issuance mentioned: $1.084 trillion - He cites the February guidance that would have generated $1 trillion and $84 billion in gross issuance. Treasury General Account: ~$800 billion to nearly $1 trillion - He says a school of thought expected the Treasury to spend down its cash balance instead of issuing coupons. 10-year Treasury yield: 4.6%-4.7% - He discusses current long-bond yields as a reference point for valuation. Current cash yield: 5.33% - He uses this as the cash benchmark when discussing term premium and bond attractiveness. Estimated path of cash: ~4.5% over 10 years - He assumes cash yields will average lower over the next decade when comparing bond excess returns. Current term premium: +25 bps - He says term premium has moved from deeply negative to slightly positive. Term premium still needed: +125 bps more expansion - He argues bonds would become meaningfully attractive only after further richening in term premium. Historical term premium range: 1%-2% - He says that would be closer to pre-QE norms and imply a 5%-5.5% 10-year yield if Fed funds are around 4%. Negative term premium last summer: -35 bps - He cites last summer’s deeply negative term premium as evidence of how rich bonds were. Negative term premium in January: -20 bps - He says term premium was still negative before the January QRA. QT taper reduction: $60B to $25B maximum runoff - He references the Fed’s June QT taper announcement. Expected QT taper in his forecast: $30B - He says he expected the Fed to taper QT by about $30 billion, but it chose $35 billion. Duration of market front-running QT: 9 months - He says markets front-ran QT for nine months before the effect fully showed up.

Pivotal Quotes: "We’re in act three, where we started last July with this act when I wrote, with a script when I wrote it." — Andy Constan: His framing of where markets are in his five-act macro cycle. "I’m bullish on two-year notes, but bearish on stocks and bonds at this stage." — Andy Constan: A concise statement of his current tactical positioning. "The thing that bothers me most... is if they had just done quantitative tightening like the BOE... they would pull the inflation off quickly." — Andy Constan: His criticism of the Fed’s QT approach and preference for stronger direct tightening.

Implications: Investors should focus less on headline Fed cut speculation and more on Treasury supply, term premium, and long-rate pressure. Constan’s view implies weaker long-duration bonds and vulnerable equities, with 2-year Treasuries and selective hedges more attractive than broad passive risk exposure.